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Expansion of AML Obligations on IM Firms: Natural Evolution or Death Knell for Boutique Operators?

Reasonable Doubt
With David Lesperance

A contrarian expert on contingency plans for the wealthy delivers uncomfortable truths.

So, now the European Commission (EC) has decided to propose to expand Anti-Money Laundering (AML) and Customer Due Diligence (CDD) obligations onto firms that offer services related to Residence by Investment programs offered by EU member states. Time for a deep dive into what this means for our industry.

Does the EU have legal authority in this area?

When evaluating these types of proposals, it is always necessary to first determine whether the EC has the legislative authority in this area or is making a proposal that is ultra vires.

In its Proposal, the EC cites:

  1. Consistency with other Union policies;
  2. A legal basis on Article 114 TFEU, the same basis as the current EU AML/CFT legal framework;
  3. Subsidiarity: The objectives of the proposal cannot be sufficiently achieved by Member States and can therefore be better achieved at the Union level;
  4. Proportionality: The cross-border nature of much money laundering and terrorist financing requires a coherent and consistent approach across Member States based on a single set of rules in the form of a single rulebook
  5. Necessity: A directly applicable set of rules at the EU level is also needed in order to allow EU-level supervision of certain obliged entities

Whether this is sufficient to say that this proposal is intra vires the EU’s authority requires a future court challenge and determination. For the sake of discussion, let’s assume that such a proposal is within their purview.

Who are the “Obligated Entities” who will be subject to these proposals?

Amongst the various firms the EU proposes to include as “Obligated Entities” are two groups that are significant to our industry. The first is Crypto-Asset Service Providers (CASPs). These are firms that act as exchanges for various types of cryptocurrency, such as Coinbase or Binance. These types of firms are already coming under extreme regulatory pressure from various individual jurisdictions to institute AML/CDD procedures.

An obvious question for RCBI firms in the future is how they handle clients who want to pay with crypto that comes not from these firms but from their own cold wallets. Effectively, the same obligations on determining the source and reporting obligations for cash would be applicable in the case of cold crypto wallets. Given the “secrecy origin story” of crypto, this may prove difficult to impossible to comply with AML/CDD obligations. As a result, I anticipate that many/most in our industry will avoid the problem by requiring that their possible client first deal with another obligated entity to borrow against their crypto or exchange it for fiat currency. The question will be whether this will be sufficient to satisfy their own AML/CDD obligations.

The second significant group who are included as Obligated Entities are “Investment Migration Operators” which includes “private companies, bodies or persons acting or interacting directly with the competent authorise of the Member States on behalf of third-country nationals or providing intermediary services to third-country nationals seeking to obtain residence rights in a Member State in exchange for [….]”

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Which RCBI firms are not considered future “Obligated Entities”?

Clearly, RCBI firms that are involved in non-EU RCBI programs are not included under this umbrella. Poignantly, however, the EU has determined that it will not include firms involved in securing CBI in an EU member state. This seemingly odd exclusion was necessary as the EU has previously taken a position that CBI programs in EU member states, should not exist

That this position is ultra vires because it interferes with Member States’ exclusive authority to determine its nationality laws, is a view held by many leading authorities on the subject. For the EU to claim jurisdiction over firms dealing with something they argue should not exist, would be an admission that CBI can exist in an EU member state. If the EU ever does more than threaten to legislate in the CBI area and lose in a court challenge, it is reasonable to assume that they will quickly extend the definition of an obligated entity to include firms that deal with CBI programs in Member States as well.

How should RCBI firms react to this proposal?

Even if this proposal becomes EU law and is held up as intra-vires, it will not take effect for several years. Furthermore, it will be very limited in scope. However, despite its lack of immediacy, I would argue that principals of RCBI firms should consider implementing a robust AML/CDD program anyway.

Such a program provides a robust defense against the regular attempted media exposés alleging wrongdoing or facilitation of criminal activity in the RCBI space. AML/CDD programs need not be prohibitively expensive to institute and operate as there are numerous quality firms that operate as outsourcers in this space. Using an outsourced AML/CDD firm allows you to avoid the fixed overhead of additional in-house expert staff. Outsourcing also maintains a level of quality and robustness that is difficult for even the largest RCBI operators to maintain in-house. Finally, outsourcing also lends itself to being a fixed disbursement that can be charged back to the client. 

Along with weeding out “bad apples” (who, in my experience, should be shunned at all costs!) an AML/CDD program also gives the RCBI firm a report that all was clear while they were involved. Should future revelations reveal that a client became a “bad apple” in the future, the RCBI firm can use this report as definitive proof that they fulfilled their obligations.

In conclusion, whether a large or boutique RCBI firm, having a quality AML/CDD program is just good business. Instituting such a program is in keeping with my first mentor’s sage advice:

The secret to survival and success is to anticipate the predictable and respond before being asked.

David Lesperance AuthorSubscriberParticipant

David Lesperance is a global leader of international tax and immigration advisors.

A published author in the field, his personal interest in these areas of law grew from his experience working as Canadian immigration and customs officer while studying law. Since being called to the bar in 1990, he has established his expertise with major law firms, his own law firm and as a private consultant. David has successfully advised scores of high and ultra high net-worth individuals and their families, many of whom continue to seek his counsel today. In addition he has provided pro bono advice to many governments on how to improve their Citizenship by Investment, Residence by Investment or Golden Visa type programs to better meet the needs of his global clients. David is supported by a team of professionals, some of whom have worked with him since the early 1990s.

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